'The Bribe Memo' and collapse of Stone & Webster
Lawsuit uncovers failed kickback scheme that dealt firm a huge blow
In Houston we're getting an instructive inside look at just what happened -- and who is to blame -- in one of the most infamous corporate collapses of all time as a jury hears the mountain of evidence against Enron Corp.'s two former top executives, Kenneth Lay and Jeffrey Skilling. But before Enron there was Boston's famed Stone & Webster Inc., which collapsed the year before, leaving shareholders and employees just as empty-handed.
Stone & Webster was once a part of the bedrock of corporate Boston, a proud engineering company that built everything from the MIT campus to many of the nation's nuclear plants. When Stone & Webster finally expired in 2000, after years of mismanagement, well over 1,000 employees were fired, their savings in Stone & Webster stock lost. Other shareholders were also left with nothing.
The media spotlight has long since moved on -- as have the two top executives, Kerner Smith and Thomas Langford, who left Stone & Webster with generous severance packages. But the story of what happened at Stone & Webster continues to unwind in US District Court in Boston. The numerous court filings make for fascinating reading.
Start with what has come to be known as ''The Bribe Memo." The critical memo, written by lawyers for Stone & Webster, lays out in detail a previously unreported secret attempt by the company to pay an illegal $147 million kickback to a relative of Indonesian President Suharto to secure the largest contract in Stone & Webster's history. When the kickback scheme finally fell apart, the project faltered, a huge blow to Stone & Webster.
Stone & Webster's outside law firm, the large New York firm of Baker & McKenzie, uses the ''C" word -- as in criminal -- in its 1997 report. Stone & Webster's participation in providing inaccurate data to the US Export-Import Bank, Baker & McKenzie wrote, ''has resulted in a violation of the Federal False Filing Statute and may constitute a part of a conspiracy" with the owners of the Indonesia project ''to defraud a US government agency." The firm said it believed Stone & Webster had also violated Securities and Exchange Commission requirements.
Attorneys for Smith and Langford say it was top management that investigated and rejected the kickback scheme. They also defend the accounting surrounding the Indonesia project, which has become the focus of a shareholders' suit. ''Stone & Webster senior management, under the direction of then CEO and board chairman Kerner Smith, employed exemplary corporate governance practices in responding to a potential violation of law, and he ensured that no foreign bribe was paid," says Jordan D. Hershman, Smith's Boston attorney.
Did a secret kickback scheme help sink Stone & Webster? A court will have to decide. Here's the untold story, according to the court records.
In 1996 Stone & Webster landed a bet-the-company project, a $950 million deal to construct an integrated ethylene and olefins complex in Indonesia, for a company known as Trans-Pacific Petrochemical Indotama, or TPPI. The catch, according to the Baker & McKenzie report: the demand by the project's owner, a relative of President Suharto for a kickback equal to about 15 percent of the project's cost, or $147 million.
First at a meeting in Houston in January 1996 and then in another meeting in Jakarta in July ''the owner made clear that he expected [Stone & Webster] to engage in an over-invoicing scheme under the contract to recycle to him the over-invoiced amounts," Baker and McKenzie wrote. Stone & Webster's general counsel objected, but a division vice president told other executives to ''find a way."
Smith also objected to the payment in a July meeting, the memo says. But the next month, the division vice president wrote the project's owner: ''We are actively exploring methods in which we can reimburse you for any payments in excess of our contract requirements."
By early 1997 Stone & Webster had developed a plan to funnel the payments to the project's owner through a British Virgin Islands company, Gates Commercial Co. Baker & McKenzie was hired to review the arrangement and found Gates was ''merely a conduit to funnel funds to the owner." The Gates scheme was rejected.
Next, Stone & Webster brought in a Korean company, Daelim, as a partner to assume a portion of the contract -- the portion that would include the kickback payment. The problem, however, was that Stone & Webster was aware that the project's financing through the Export Import Bank included the $147 million bribe to the owner. Wrote Baker & McKenzie: ''Inclusion of the $147 million as part of the total project cost in Ex-Im Bank submissions, directly or indirectly, is materially false and inaccurate."
Baker & McKenzie made a series of recommendations to extricate the company from its problems. ''It is, in our opinion, critical to the welfare of the company that these recommendations be implemented," the lawyers wrote. ''Otherwise, the company and certain of its personnel may be implicated in criminal activity. In this regard, we have received the support and endorsement of the CEO and the general counsel. The CEO has instructed the group president and project personnel to implement the recommendations. However, there have been instances where the group has not done so."
Stone & Webster eventually abandoned the kickback scheme, and the project was put on hold or was abandoned -- depending on who is telling the story.
In a lawsuit, the lead plaintiffs -- Ram Trust Services and Lens Investment Management, headed by activist Maine investor Robert A.G. Monks -- say the failure of the Indonesian project left Stone & Webster deep in the hole.
Smith and Langford, they contend, needed time to dig out the company so they claimed the project was merely on hold. And they continued to book hundreds of millions in revenue they never received, say the lawyers, Sidney Liebesman and Jay Eisenhofer in Wilmington, Del.
Monks says Stone & Webster should have more fully disclosed the depths of the problems and taken a charge for the Indonesian project then. But the company did not. Monk's lawyers cite a videotaped presentation that Smith made to employees in Denver in March 2000 in which he said the Indonesian project ''basically went bankrupt" in late 1997. ''Smith added that had S&W taken a charge at that time for canceling the contract as opposed to what it did -- treat the contract as merely suspended -- S&W would probably have gone out of business," the plaintiffs' lawsuit charges.
Like Enron and so many of the other corporate failure stories, the Stone & Webster dispute now playing out in US District Court is at heart about the accounting.
Plaintiffs' lawyers say shareholders who came after the failure of the Indonesian project lost everything. Stone & Webster's stock market value sank from $590 million in January 1998 to next to nothing by mid-May, when the company filed for bankruptcy court protection.
The lawyers cite the sale of 1 million shares of Stone & Webster stock for $15 million to the employee stock plan just a few months before the bankruptcy. ''This rapacious act, impairing the retirement funds of S&W workers, bordered on criminal misconduct," the plaintiffs say in court papers. They have targeted Stone & Webster's accountants, PricewaterhouseCoopers, and the insurers in the suit.
Attorneys for Smith and Langford say the executives acted absolutely properly. Smith objected to the kickback scheme when he was first told about it, lawyer Jordan Hershman says, and hired Baker & McKenzie to investigate when he learned his original orders had not been followed. Indeed Baker & McKenzie, while highly critical of others in the company, is supportive of Smith: ''The CEO has acted consistently in accordance with our advice."
Hershman and John Donovan, Langford's lawyer, defend the accounting as appropriate, and approved by the outside accountants. The proof, they say: The project was eventually built by the Shaw Group, which bought Stone & Webster's assets. That project, however, was in China and not Indonesia, and built by another owner. The plaintiffs' attorneys say it was a different project altogether.
Many of the themes in the current lawsuit echo those in a lawsuit the Shaw Group previously brought against Smith. In that lawsuit, the Baton Rouge, La., construction and engineering firm charged Smith ran the company ''right into bankruptcy," and challenged his severance package, which the suit said exceeded $10 million. That lawsuit was eventually settled.
Everyone lost in Stone & Webster -- some more than others.
Today Langford is an executive for a construction firm in Greece. Smith lives in a $2 million, 18th century home in Falmouth, with 5 1/2 baths and four fireplaces. He runs a consulting firm, Internet Power Inc., out of his home. Stone & Webster's employees, on the other hand, lost not only their jobs, but much of their retirement savings. The final bill: about $123 million in company stock in their 401(k) and employee stock ownership plans.